5/19/2009 @ 1:40AM

No Easy Ride In Taiwan For China Carmakers

HONG KONG–In a long-shot bid to become global brands, China’s automakers want better technology. Taiwan’s advanced auto parts suppliers want further inroads into China’s auto market, now the world’s biggest. Now that China and Taiwan are drawing closer in their economic embrace, is this a match made in heaven? Not so fast.

Taiwan’s Big Three auto parts suppliers–Tong Yang Industry, TYC Brother Industrial and Depo Auto Parts Industrial–are all family-controlled. That means they will not easily cede control or direct stakes to mainland investors, particularly as they already have various joint ventures with mainland automakers, some analysts say.

Investors’ anticipation of a flood of mainland investment has buoyed the Taipei stock market, after Beijing ended a 60-year chill on mainland investments in Taiwan this month and President Ma Ying-jeou has opened up his recession-hit island to mainland money, flights, cargo and tourists. Shares of Tong Yang, TYC Brother and Depo have all posted double-digit gains in the past month.

The State Council, China’s cabinet, has indicated that domestic automakers are in want of technologies for engines, steering systems, braking systems, transmission, and suspension systems (See “What’s On China’s Shopping List?“). Largely focused on the declining U.S. auto market, technologically advanced Taiwanese auto parts makers need to further shift gears to the China market.

But takeovers of or direct investments in the Taiwan suppliers may not be so easy. “I don’t see a lot of Taiwanese families selling down their stakes,” said an analyst from a Taipei brokerage, who asked to remain unidentified due to company policy. “I think there is some sort of barrier.”

In a fragmented sector, “most of the auto parts companies in Taiwan are family-controlled,” said a Taipei-based analyst for a multinational brokerage. In Taiwan, that typically means a family controls over 20% of a company and the original shareholders of a listed company are from the founding family.

Tong Yang, chaired by Wu Yongfeng, is controlled by the prominent Wu family. A different Wu family is heavily involved in TYC, chaired by Wu Junji, and the Xu family runs Depo, chaired by Xu Xuming. “The key obstacle is whether these kinds of chairmen would want to release issues” of shares, a third Taipei analyst said. An outside investor would need to “give them something” not obtainable from joint ventures or procurement.

Furthermore, competition for supplying auto parts to the likes of SAIC Motor and
Geely
remains intense. Since asset valuations are low around the world, auto parts makers in U.S., Europe and Australia, as well as domestic joint ventures, are good candidates too, said Hong Kong-based analyst Ricon Xia, who tracks mainland automakers for Daiwa. The speculation about mainland investment in Taiwan auto parts suppliers is “only based on the idea or logic that the government is encouraging a closer relationship between the mainland and Taiwan,” he said. It “doesn’t mean that we have to buy from Taiwan.” Mainland automakers have to consider an array of commercial factors, such as profitability, components for different and new product lines, and so on.

In late March, Geely bought Australian auto transmission supplier Drivetrain Systems International, which went bankrupt as its major clients, the U.S. automakers, floundered. Around the same time, Delphi, the bankrupt auto parts company that once belonged to
General Motors
, sold its brakes-and-suspension business to BeijingWest Industries.

Still, analysts agree that closer ties with mainland automakers would be good for Taiwanese auto parts makers, whether through direct investments from a joint venture partner or bigger procurement contracts. The Taiwanese manufacturers already have a strong mainland presence: Tong Yang, for instance, has joint ventures with SAIC, FAW, and Changan to produce plastic vehicle parts.

But Taiwan companies will be treading carefully. Some South Koreans were vitriolic about SAIC’s handling of its controlling stake in their country’s third-largest automaker, Ssangyong Motor, which filed for bankruptcy in January. South Korean analysts accused SAIC of stripping Ssangyong of its technology without helping Ssangyong gain ground in the Chinese market.

“These kinds of things always happen,” said one of the analysts. “It depends on how you want to structure these partnerships.” As the saying goes, two people may sleep in the same bed but have different dreams.